The Market Measures segment from August 12, 2016, "Russell Index: Put Calendar Spreads" examined buying Put Calendar Spreads in RUT (Russell 2000) in low Implied Volatility (IV) situations. Our study showed it should be a profitable strategy. The SPX has a high correlation to the RUT and is high priced. It should do well for the reasons RUT did. How would a long Put Calendar Spread strategy work in the SPX?
Our study was conducted in the SPX using data from 2005 to the present. We simulated purchasing a Put Calendar Spread every day. The spread consisted of a long 40 Delta Put using the expiration cycle closest to 60 Days To Expiration (DTE) and a short Put with the same strike closest to 30 DTE. We then compared holding the position to expiration versus (if possible) managing at 10% of the debit paid (10% ROC), managing at 25% of the debit paid (25% ROC) or managing at 50% of the debit paid (50% ROC).
A results table of SPX PUT Calendar Spreads was displayed. The table compared the average debit (0.91% of the SPX price), average P/L, success rate and average trading days held on SPX Calendars managed at 10% , 25% and 50% of the debit paid or held to expiration of the front month. Managing early improved results and the 10% level had the best overall metrics. Tom noted that the higher priced Index and the added liquidity in the SPX helped give stronger P/L results as compared to that of the RUT Calendars.
A second results table of SPX Put Calendar Spreads entered when IV Rank
was below 25 was displayed. The table compared the average debit (0.83% of the SPX price), average P/L, success rate and average trading days held on SPX Calendars managed at 10%, 25% and 50% of the debit paid or held to front month expiration. A table comparing the average ROC for RUT vs. SPX Calendars when IVR was below 25 and the trades were managed at 10% of the debit paid was displayed. The table showed a significant jump in the ROC of the SPX (8.9%) as compared with the ROC of the RUT (3.0%). While RUT performed notably better in low IVR it made little difference in SPX.
For more information on Calendar Spreads see:
Market Measures from December 30, 2015: "Calendar Spreads | A Hedged Strategy"
Best Practices from April 27, 2016: "Calendar Spreads"
From Theory To Practice from April 14, 2016: "Strategy Session: Calendar Spreads"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and our study results testing long Put Calendar Spreads in SPX and comparing the results to the same in RUT.
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